.svg){kind=icon}
The term ‘dry powder’ has its origins in the 17th century when cannon battles were fought on the high seas and dry powder was what fueled the cannon fires.
These days, the high seas have been replaced by high finance, and all the talk is of dry powder in the hands of private equity investors.
This is the DealRoom guide to dry powder.
Dry powder is the cash and cash equivalents (money market funds and other highly liquid assets) that private equity funds and investors hold, primarily with the intention of investing it at some point in the future. The total volume of dry powder, measured in dollars, is used as a proxy for the scale of investment potential that currently exists in the market.
When investors provide private equity and venture capital firms with money, they do so in the expectation that the funds will be invested in assets that generate an attractive yield.
These opportunities don’t always present themselves immediately, meaning that the private equity and venture capital firms will hold these funds in reserve - usually in the form of money market securities - until such time as the attractive opportunities arise.
This is where the term ‘dry powder’ comes from. Like the dry powder used on cannon ships centuries ago, dry powder in the cash form is waiting to be used by the investors at the right time to strike. Figures released by Prequin, a market research firm specialized in the private equity industry, show that US dry powder is currently close to $1 trillion, while Statista figures show that global dry powder surpassed $3.4 trillion at the end of 2021 (see below).
This growth in dry powder can be attributed to a number of factors.
First, the private equity and venture capital sectors, like many alternative assets, are becoming a bigger chunk of portfolios, as investors everywhere try to diversify more. Second, there has been much more interest in US public pension funds, which have nearly quadrupled their allocation in private equity as a percentage of net assets since 2008. So, while dry powder may be at record levels, it doesn’t necessarily suggest a speculative bubble.Â
The long-term impacts of dry powder are a constant source of speculation for private equity industry analysts. A common consensus is that having so much capital chasing a relatively steady quantity of opportunities will inevitably lead to higher price multiples being paid by investors. The rational here is that having several times as much capital should lead, in some cases, to bidding wars between investors for the best opportunities.
If this is the case - and it seems that there is solid logic behind the rationale - we can assume that more private companies may choose to stay private, where the relative merits of seeking capital on the public markets are ebbed away.
In fact, at least as far back as 2014, investors have commented on how private companies are taking longer to go to IPO. This may become even longer as more capital is available in private markets.
Record levels of dry capital are also likely to encourage private companies to seek funding when they might not have before. The increased issuance of private debt (see next section) suggests that companies are taking advantage of the dry powder reserves to answer their own liquidity needs. And when they can provide private equity companies with higher levels of returns than money market funds, a rare win-win situation emerges.
What are some of the trends emerging from the unprecedented levels of cash sitting on the balance sheets of private equity and venture capital funds? Here are a few:
With so much public discourse around dry powder, it can be difficult to separate the noise from the insights.
M&A Science aims to achieve just that, providing industry-leading opinion and expertise on private equity and venture capital strategies, which generate value for both investors and startups.
If you’re looking for increased clarity at a time when the markets are increasingly volatile, turn to M&A Science for thought leadership at all levels of corporate finance.
.jpg)
The term ‘dry powder’ has its origins in the 17th century when cannon battles were fought on the high seas and dry powder was what fueled the cannon fires.
These days, the high seas have been replaced by high finance, and all the talk is of dry powder in the hands of private equity investors.
This is the DealRoom guide to dry powder.
Dry powder is the cash and cash equivalents (money market funds and other highly liquid assets) that private equity funds and investors hold, primarily with the intention of investing it at some point in the future. The total volume of dry powder, measured in dollars, is used as a proxy for the scale of investment potential that currently exists in the market.
When investors provide private equity and venture capital firms with money, they do so in the expectation that the funds will be invested in assets that generate an attractive yield.
These opportunities don’t always present themselves immediately, meaning that the private equity and venture capital firms will hold these funds in reserve - usually in the form of money market securities - until such time as the attractive opportunities arise.
This is where the term ‘dry powder’ comes from. Like the dry powder used on cannon ships centuries ago, dry powder in the cash form is waiting to be used by the investors at the right time to strike. Figures released by Prequin, a market research firm specialized in the private equity industry, show that US dry powder is currently close to $1 trillion, while Statista figures show that global dry powder surpassed $3.4 trillion at the end of 2021 (see below).
This growth in dry powder can be attributed to a number of factors.
First, the private equity and venture capital sectors, like many alternative assets, are becoming a bigger chunk of portfolios, as investors everywhere try to diversify more. Second, there has been much more interest in US public pension funds, which have nearly quadrupled their allocation in private equity as a percentage of net assets since 2008. So, while dry powder may be at record levels, it doesn’t necessarily suggest a speculative bubble.Â
The long-term impacts of dry powder are a constant source of speculation for private equity industry analysts. A common consensus is that having so much capital chasing a relatively steady quantity of opportunities will inevitably lead to higher price multiples being paid by investors. The rational here is that having several times as much capital should lead, in some cases, to bidding wars between investors for the best opportunities.
If this is the case - and it seems that there is solid logic behind the rationale - we can assume that more private companies may choose to stay private, where the relative merits of seeking capital on the public markets are ebbed away.
In fact, at least as far back as 2014, investors have commented on how private companies are taking longer to go to IPO. This may become even longer as more capital is available in private markets.
Record levels of dry capital are also likely to encourage private companies to seek funding when they might not have before. The increased issuance of private debt (see next section) suggests that companies are taking advantage of the dry powder reserves to answer their own liquidity needs. And when they can provide private equity companies with higher levels of returns than money market funds, a rare win-win situation emerges.
What are some of the trends emerging from the unprecedented levels of cash sitting on the balance sheets of private equity and venture capital funds? Here are a few:
With so much public discourse around dry powder, it can be difficult to separate the noise from the insights.
M&A Science aims to achieve just that, providing industry-leading opinion and expertise on private equity and venture capital strategies, which generate value for both investors and startups.
If you’re looking for increased clarity at a time when the markets are increasingly volatile, turn to M&A Science for thought leadership at all levels of corporate finance.
.png "Frontrunners Badge"){kind=icon}
.png "Shortlist Badge"){kind=icon}
.png "Category Leaders Badge"){kind=icon}
.svg)
.png)
